Fix Mexico's Banks, Not China's

It always puzzled and shocked me that some Latin American and Eastern European countries have private credit to GDP ratios of merely some 30%. What can you do with so little credit? It is barely enough to sustain basic investment given some reasonable assumption of asset-to-GDP ratio.

I notice that bank in Asians’ definition is quite different from what people outside Asia define banks. In Asia, bank lending strikes you as commercial and industrial (C&I) lending that finances purchase of equipment and building of factories, while outside Asia banks focus on mortgage and consumer lending.

So Asian banks are actually development or long-term credit banks in Western definition, and certainly we cannot evaluate their performance based on the same safety requirements, if we want them to promote economic growth.

In China, lending has historically been C&I loans. Certainly NPL ratio will be higher if you do C&I, but we have to understand why we need banks in the first place when it comes to development: we first want them to do C&I so as to promote economic growth, and then come the requirement that we want them to be stable.

Inefficient allocation of funds is certainly one main reason why non-performing loan ratio is high, but high NPL ratio only means that the private benefit of the failed projects are negative; the social benefit could still be positive. For many developing countries, it may not be profitable to invest in roads, dams, power plants, etc, but there is no question that the society’s benefit is far higher than the cost.